With news of yet another Wall Street icon or banking giant tumbling arriving on an almost daily basis, the Congress and Bush administration enacting a massive $700 billion bailout to prevent a complete meltdown (which is probably only the first installment), and the stock market gyrating wildly with each new shockwave, planners may wonder what all this may mean for planning practice (that is, after they finish anguishing over their own pension plan or investment portfolio).
At a session called "Development Economics for Planners" at the recent California Chapter, American Planning Association annual conference, urban economist Tim Youmans of Economic Planning Systems told planners he had shortened his presentation to one power point slide, "Check back with me in two years." That was a joke, but Youmans did opine that lenders of all types that provide the capital essential to both public and private development projects can be expected to be much more conservative and risk sensitive. Even well-qualified borrowers with sound projects will have difficulty getting credit. Tighter loan-to-value and debt-income ratios will put the squeeze on sources of capital necessary to complete project financing. Youmans and his fellow panelist quipped that they had planned to include a developer as one of the presenters, but "we couldn't find any." Wry humor aside, the current crisis reinforces the need for planners to become more economically literate and develop a better understanding of market forces and how capital markets work to provide financing for development.

Consequences for Planners

Local public agencies with planning staff funded by developer application fee revenue have seen activity decline dramatically, and budget cuts and layoffs occur as a result. Projects well along in the development approval pipeline are simply being abandoned in some cases. Others that are nursed along to final approval may require permit extensions or future amendments to incorporate value engineering to reduce costs that previous inflated housing prices could support, but which are not in line with the new economic reality. Even with extensions, some projects will simply never be built. Local governments are likely to be asked to renegotiate development agreements that promised community benefits that are no longer economically feasible. Falling home values will prompt homeowners to seek reassessment of their properties to reduce their property tax burden, a move that will further reduce public agency revenues.

Core Planning Policy Issues

The congressional debate resonates with themes that are core issues for planners. Markets are praised or pilloried as the reason to do nothing so that foolishness is made to suffer the consequences or as the illustration of the emptiness of the ultimate market philosophy, "greed is good." Does regulation stifle the market's ability to respond to demand and drive down costs? Is regulation and rescue tantamount to socialism? Ideological purists of all kinds have plenty of fodder for their rants, but a balanced course of action based on a sound understanding of how markets work and what they can do well, and how they can fail, will provide the most constructive policy. The crisis is in large part a result of abuse or distortion of markets. Intermediaries (brokers, attorneys, accountants, bankers) created impossibly complex investment instruments. These investments were designed primarily to insulate the intermediaries from risk or liability, while also promising the improbability of secure investments with unsustainably high returns. All was fueled by promotion of spending beyond our means.

Capital - A Scarce Resource Critical to Positive Planning Outcomes

Planning without taking into account market demand and at least a rudimentary knowledge of how development is financed leads to irrelevance and futility – wasting the technical expertise of planners and the political capital of public involvement in the planning process. Surrendering to mystical claims that a project "doesn't pencil out" or unsupported arguments of financial infeasibility won't work either. With a more sophisticated understanding, planners can tailor land use and environmental regulation to reduce risk and minimize costs for desired development models, and thus be more likely to attract capital in a world where we have become increasingly aware that it too is a finite resource.

Like water seeks equilibrium, capital seeks to optimize risk and return. Markets, such as carbon credit trading and transfer of development rights, can also be effective planning tools. Trading the most efficient means of reducing greenhouse gas emissions will have the most impact the quickest and can be tuned to underwrite the most broadly beneficial development and conservation goals, such as transit and compact development. Transfer of development rights can capture the windfalls that planning and zoning entitlements can create, to compensate landowners for the wipeout of their expectations, and to preserve habitat and agricultural open space.
Markets are perhaps the biggest single factor affecting planning outcomes. Plans that ignore markets, and markets that do not capture externalities (like GHG, air quality, time stuck in traffic, loss of open space) because planning has failed to effectively incorporate them both need the increased understanding and attention of planners and policymakers in the land use arena.
– Joel Ellinwood, AICP


Copies of the September 23, 2008, APA-CA session presentation "Development Economics for Planners and other Land Use Professionals" by Joel Ellinwood, AICP, and Tim Youmans, along with a list of further reading and resources is available at http://www.lawyer-planner.com.